When "Omar" director Hany Abu-Assad was growing up in Nazareth, boys from all over town would stampede into Cinema Diana for the Sunday double-feature, outnumbering the seats by as much as 10 to 1.

Mr. Abu-Assad was just 5 years old when his uncle took him to see a cowboy movie, which seemed so real to him that he could barely grasp the concept of the silver screen. “After the film, I went behind the cinema to search for the horses,” he says. “This cinema influenced us enormously.”

In addition to cowboy flicks, there were Bollywood musicals, Turkish melodramas, and Egyptian films. But there was not a single Palestinian movie. Mr. Abu-Assad decided to change that after he saw “One Flew Over the Cuckoo’s Nest” as a teen.

“This was an enormous inspiration, not to give up on oppression. They can make your life miserable if you don’t obey the rules, but they can’t kill your spirit,” he says. “It awoke my spirit.”

Today, "Omar" – which explores the exploitation and distrust between Israeli intelligence agents and their Palestinian collaborators – is one of five films shortlisted for an Academy Award for Best Foreign Language Film.

While it has been billed as the first movie fully funded by the Palestinian cinema industry, it is not the only one to emerge from Nazareth, which has established itself as a hub of provocative Palestinian films. Abu-Assad is one of four pioneering filmmakers from the same generation who were weaned on Cinema Diana and who have gone on to become prize-winning directors and producers.

Their work has brought a Palestinian lens to the world and, perhaps more importantly, turned a lens on Palestinians themselves, aiming to stir new thinking on issues from identity to freedom. That work is complicated, however, by the fact that many Palestinians no longer have access to a local theater. Even the beloved Cinema Diana has long since closed.

The old cinema building is now occupied by a Super-Pharm drug store with garish lights, but its legacy is stamped on the neighborhood’s shops, with everything from the laundromat and mini-market to the steamy shwarma joint and elegant bakery bearing its name.

On a recent Saturday night, Baheej Hassan, owner of Diana bakery, serves up Arab sweets to a steady flow of customers. He fondly recalls going to the little cinema growing up; now his teenage daughters make the 45-minute trip to Haifa to see films. He knows of "Omar," but unlike American audiences who attended the premier in dozens of theaters last week, he hasn't yet had the opportunity to see it.

Suppressed dreams

The fact that “Omar” has garnered global attention shows how far Palestinian cinema has come since Abu-Assad was a kid. When he told his parents he wanted to become a Palestinian director, they laughed.

“The image of the director was people who were losers,” says Abu-Assad. “In the [Middle] East, if you are good, you study engineering or become a lawyer or a doctor.”

So he went to the Netherlands to study aerospace engineering, but caught as many films as he could at local museums and cinemas. Among his favorite directors were Francis Ford Coppola, Bernardo Bertolucci, and Costa-Gavras. Then one day he saw a film by Michel Khleifi of Nazareth.

“I cried, I was so proud seeing a Palestinian movie on the big screen in Holland. It gave me the power to say, ‘See, we can do it!’ ” recalls Abu-Assad.

After a short stint in engineering, Abu-Assad returned to Nazareth and landed a job as an assistant for a TV movie. He steadily learned the trade and began garnering global attention for his work. In 2006 his film “Paradise Now,” about two young men from Nablus planning a suicide bombing in Israel, became the first Palestinian film nominated for an Oscar. “Omar” is his second nomination.

Omar, a young Palestinian man who works in a bakery, is arrested as an accomplice to the shooting of an Israeli soldier. After being severely beaten by his Israeli interrogator, he agrees to collaborate with Israeli intelligence authorities in exchange for being released. While that brings him physical freedom, it has a devastating impact on his life – and his budding romance with a Palestinian girl. The result is a storyline filled with angst, frustration, betrayal, and a negative portrayal of Israeli policies and authorities.

An Israeli film with a similar plot, “Bethlehem,” was also nominated for Best Foreign Language Film. But “Omar,” the first film to be recognized by the Academy as coming from Palestine”(despite being filmed partly in Nazareth and with Israeli Arab actors), beat out “Bethlehem” for the Oscar short list.

A fight for the soul

While an Oscar may be the most coveted prize, Abu-Assad’s fellow filmmakers from Nazareth have garnered many awards. Mr. Khleifi took home the International Critics’ Prize from Cannes in 1987 for his film, "Wedding in Galilee," while Elia Suleiman’s “Divine Intervention” won the Jury Prize at the 2002 Cannes Film Festival. The most recent documentary by producer and editor Nizar Hassan, “Sleepless Nights,” won the Cinema in Motion Award at the 2012 San Sebastian Film Festival for its exploration of how a bereaved mother and former high-ranking intelligence officer came to terms with the war’s atrocities.

All four filmmakers were born in 1960 or 1961, with the exception of Khleifi, who is a decade their senior. Why Nazareth, Jesus's hometown, became the locus for Palestinian cinema is a matter of debate. Abu-Assad says good directors need big egos, and there's nothing like pilgrims coming to your city from all over the world to make you feel important. Mr. Hassan chalks it up to serendipity, and the fact that Nazareth was one of the few places in historic Palestine where you could see films.

Add to that a potent mix of 1960s wildness and local political tensions. The four filmmakers were all young and impressionable when the 1967 war broke out between Israel and its Arab neighbors, including Palestinians in the West Bank – a half-hour drive from Nazareth.

Hassan, who recently screened “Sleepless Nights” to a full house in the Mahmoud Darwish Cultural Center in Nazareth, sayshe and some of his colleagues wanted to be freedom fighters, but ultimately decided to wield a camera instead of a gun.

Their fight was not so much focused on romantic notions of the land of Palestine, but on Palestinian thought and the necessity of preserving and shaping national identity through cinema.

“We were absolutely fighting for Palestinians, not Palestine … liberating ourselves to have a free mind and a free soul – and cinema definitely gave us these things,” says Hassan, who favors films that provoke self-examination more than international sympathy, and criticizes “Omar” as not creating much of a cultural discourse about Palestinian liberation.

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But Abu-Assad argues that the central theme of “Omar” – how Israeli authorities “create paranoia” inside Palestinian society by recruiting spies – can help strengthen the Palestinian struggle.

“When you are aware of your situation, of what’s going on in the world, … you can really create a better strategy in resistance,” he says, before hanging up and going back out to promote “Omar” ahead of the Oscars.

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